Category Archives: Investing Money

Why A Market Crash Could Be Just Around The Corner

bear-market-bearMy Comments: The prophet of doom strikes again!

No, seriously, the evidence is mounting and the financial pundits are all talking about this. Some of it is the threat of a Trump presidency, which I believe is a real threat. The rest of it is mostly mathematics and economics and history.

If you have money in places where you can control how it’s invested, I encourage you to call someone and have them move it to cash or something similar. While accurately timing the market is a myth, a defensive move on your part for the next six to twelve months could eliminate a lot of chaos in your life.

Oct. 28, 2016 by INVESTIV


  • We’ll discuss some risks first and then discuss potential rewards.
  • Valuations are the tipping point toward a riskier perspective.
  • After reading this article you’ll be able to decide for yourself what the best strategy is for you to follow.

In order to see where the market is going, let us first take a look at what the market has been doing in the last two years. The market has had a 7% yearly return if we look at it from October 15, 2014, however, if we wait a month, the yearly return for the last two years will fall to 1.8% per year. 1.8% a year plus a dividend yield of 2% isn’t bad in the current low yield environment, but it is bad when compared to the risks stock investors are running.

Risks: Where The Market Could Go

As the market is severely influenced by the actions or inactions of the Fed, the first risk comes from an interest rate increase likely to come in December. The market is already preparing for it as 10-year yields are slowly increasing and the dollar is strengthening.

This is a risk for stocks as a stronger dollar lowers international revenues in dollar terms and consequently lowers earnings. Also, higher interest rates and treasury yields will lower the demand for dividend yielders. Since this bull market started back in 2009, the yield spread between the S&P 500 dividend yield and bonds has consistently been around 300 basis points. If yields increase, the S&P 500 is bound to decline in order to continue having a yield advantage which is inherent for the risk premium for stocks.

If the FED increases rates, the risks are high. Unfortunately, if the FED doesn’t increase rates the risks are also high. The FED might not increase rates or may quickly lower them after an increase if the economic and employment situation starts to deteriorate. As we’ll show you in a moment, the economic situation isn’t that great.

The FED looks primarily at three factors: economic growth, employment, and inflation.

Economic growth has been slowing down in the last two years, alongside declining corporate earnings. The estimates foresee improving economic growth of around 2.5% for the next few quarters, but you know how estimates are, made to be missed.

Bad economic news would be detrimental for stocks as it would mean slower growth and lowered earnings, while good economic news would also put pressure on stocks with increased interest rates and a stronger dollar.

On the employment side, things have improved substantially in the last 7 years but similarly to GDP growth, labor market conditions haven’t seemed to improve in the last two years. The Labor Market Condition Index derived from 19 labor indicators has been trending down for two years now and even entered negative territory in 2016.

Inflation has been increasing in the last 12 months which isn’t a good sign if economic activity and labor conditions continue to deteriorate because it will force the Fed to increase rates even though the economics aren’t that good.

All of the above mentioned risks are a normal consequence of economic cycles as there are always things that improve and others that slow down. We can also see this in the current downturn in the oil market. But when these risks are related to current valuations, we can see the real risks low interest rates, a recession, a weaker labor market, and higher inflation create.

As the S&P 500 has a dividend yield of 2.08% and an earnings yield of 4.04%, any significant increase in interest rates would result in a bear market. Similarly, a recession, declining employment or higher wages would push down earnings as well as asset prices.

On top of internal risks, external risks could also have an impact, like fears over China had back in August 2015 and on Thursday when the index was down 1.2% at one point as a result of a decline in Chinese exports.

The main question is, when might the above mentioned risks materialize? Well, forecasting is an ungrateful profession, but I can take an approximate shot at it.

I wouldn’t be surprised if we see a bear market in the next 12 to 24 months as we are currently in an environment without clear indications, the economic growth period already exceeds the average growth period between recessions, and the current economic recovery has been the weakest since the second world war despite the incredibly low rates and quantitative easing.

Let’s attach a 50% probability for a bear market in the next two years, which is a bit higher than J.P.Morgan’s 38% probability, but in line with predictions from Deutsche Bank.

Now that we’ve shown the risks, let’s analyze the potential upside.

Rewards: Where The Market Could Go

A person yelling that the market was overvalued in January 1998 was completely right, but the market went up a whopping 36% in the next two years only to fall by 46% after 2000. Similarly, we can now yell that the market is overvalued, which it is, and then watch it climb to new highs in the next couple of years. Let’s see what the probability and reasons for such a bullish perspective are.

• The Cavalry: The FED will step in at any sign of trouble.

The current bull market is clearly fueled by the FED’s stimulus. If the market shows indications that it will drop or that there is a probable recession, the FED will probably do the only thing it can do, print more money.

• Corporate profit growth.

Unlikely in the case of a recession and with the high competition in business created by the low interest rates, but a recovery in oil prices could push earnings up and consequently the market.

• Tax Holiday: Increased buybacks and dividends due to profit repatriation.

If the government would allow corporations to repatriate the $2.1 trillion in cash stashed overseas at no cost, it would certainly give a boost to buybacks and push stocks higher as managers never think they are overpaying for their own stock. You can read more about this topic in our article here.

• Global economic growth.

As emerging markets are bound to reach the level developed countries have due to improvements in technology, trade, and capital flows, the global economy could push ahead with big strides, especially if commodities rise. This will happen for certain as commodities are a pure cyclical play.

What is the probability of the above happening? Well, faster global economic growth, corporate profit growth, and a tax holiday will all happen eventually, while we don’t know if the FED is going to increase its stimulus to prevent a market decline.


With market risks and potential catalysts being almost equal weight, the tipping point is valuations. Ask yourself if you are happy owning assets that can easily drop by more than 25% for a meager 2% dividend yield, a 4% earnings yield and no earnings growth.

If you are convinced that the stock market is risky, what you can do is invest in uncorrelated assets, lower your exposure to the general market, and have a larger cash position. More cash will provide you with the necessary firepower to buy if there is an eventual market downturn and stocks become much cheaper.

It’s hard to believe but Nike (NYSE:NKE) was trading below $10 a share back in 2009. A bear market will produce plenty of such opportunities so have some cash ready.

When Will The Great Stock Market Crash Begin?

Happy Trick or Treat Day!

For years, I’ve told my kids, my clients, and myself that life does not move in a straight line. There are going to be ups and there are going to be downs and some of them are going to happen when you least expect it. Life is what happens when you are making other plans. And please God, can we get this election over with?

This is from Britain, where they have their own issues to solve. But with globalization firmly entrenched, what happens there will happen here.

Richard Dyson on October 31, 2016

So, when will the crash begin?

When will the huge sell-off – in both shares and bonds – convulse world markets, obliterating trillions of dollars within weeks and triggering a domino-effect collapse of banks, other financial institutions, pension funds and even governments?


There is certainly a growing chorus of voices claiming the inevitability of this Armageddon. Many think it is nigh.

You know their argument: a tsunami of money has swept through the markets in pursuit of returns. But, in a world where returns have been crushed by years of central bank intervention, the outcome has been to rocket-propel the prices of everything from government bonds to property and shares.

We’re at a point where valuations of swathes of the stock market here and elsewhere are frighteningly high in comparison with long-term average measures.

The price of government bonds issued by Britain, Germany and the United States may have fallen in recent weeks, but their yields remain as negligible as a few months ago.

Sky-high valuations are in themselves worrying enough, but they come at a time when the economic outlook is uncertain at best.

The ability of many British companies to maintain dividends – arguably one of the main reasons for driving their share prices to such heights – has rarely been less secure.

So it is quite natural to give time to those who cry doom.

One is Bill Bonner, an American-based financial author and publisher, and founder of the blog The Daily Reckoning, who wrote in recent days:
“The crisis will move too fast for policymakers and investors. Stock investors will tell themselves they will get out, but when a real panic starts, it’s too late.

“A rerun of the panic of 2008 could erase $30 trillion in a few weeks. If the panic is caused by rising inflation, the bond market would be walloped, too. Our advice: panic now, before everyone else. Evacuate overpriced and dangerous assets.”

That sounds terrifying.

I get the argument, but I for one will not sell any of my share-based investments in my Isa and pension on the strength of it. Here are three reasons why.

1. When would I buy again?

Say I heed Mr Bonner and sell. Sitting in my broker accounts is then a pile of cash, earning nothing, and waiting for … what?

The graph below tells a familiar story but one worth revisiting. The danger of not being in the market is that you miss those significant, but sometimes brief, bounces.


Big market movements take place in short periods. Algorithmic models have been developed to detect rising volatility as signals to get in or out at the perfect moment, but these are doubtful. The reality is that no one knows when the big up (or down) days will arrive. What we do know for certain is that not participating at all can be costly.

2. Yields on many British shares are not that low

The FTSE All Share still yields 3.5pc, a huge number, given that some government bonds yield less than nothing. While share prices as multiples of earnings (p/e ratios) may have shot up alarmingly in some sectors, that’s not the case across the whole market.

Our big dividend payers – such as oil and pharmaceuticals – suffered earlier this year because of doubts about their ability to pay dividends. They’ve mostly reiterated their dividend commitments since, yet still don’t trade on the scariest multiples.

Company boards can, of course, be committed to dividends yet still unable to deliver: but markets and commentators are notorious for predicting recessions and other disasters that do not materialise.

3. Yield isn’t everything, anyway

Most investors, like me, own in the end tiny stakes in multiple companies, many of which are healthy, growing enterprises whose operations won’t screech to a halt just because share prices bomb. As veteran investor Terry Smith writes, why else invest?

Stocks Heading Toward A Healthy Cleanse

money mazeMy Comments: My thinking about a market crash is evolving. I think it’s much closer than it was six months ago. I think it will be relatively short lived. I don’t expect it to be as deep as the one that happened in 2008-2009. But it will happen, and for some of us, it will be painful.

by Eric Parnell, CFA | October 14, 2016

The stock market needs a good cleanse. A solid correction is just what the doctor ordered in working the market back toward some semblance of true fundamental health.

Many signs suggest that such a cleanse could begin to take place at any time now.

Any potential cleanse should be view with opportunity through the start of next year.

The stock market needs a good cleanse. Having become chock full of all sorts of toxins since the calming of the financial crisis so many years ago, a solid correction is just what the doctor ordered in working the market back toward some semblance of true fundamental health. Many signs suggest that such a cleanse could begin to take place at any time now.

In fact, one is long overdue. And for investors focusing on the short-term time horizon, any such stock market cleanse that begins to unfold in the coming week should be viewed as a potentially attractive buying opportunity for holding periods through the start of next year.

Feeling Sluggish
The U.S. stock market has been stuck in a sluggish trading range for far too long now. Despite all of the talk of new all-time highs, the S&P 500 Index (NYSEARCA:SPY) has effectively gone nowhere for the last two years since the end of QE3 in late 2014.

Along the way, it has endured a few corrections that have been unsettling for investors already fidgety about the fact that U.S. stocks are trading at historically high valuations and steadily declining earnings at a time when stock markets around the rest of the world have given way to the downside a long time ago now. In short, it has been a long and sleepless road over the past two years in generating flat-to-low single-digit returns at best on the headline benchmark U.S. stock index.

Nevertheless, the S&P 500 Index remains the leading major stock market on the planet given that supposedly there is no alternative (TINA) to owning U.S. large cap stocks. Thus, it is worthwhile to consider where we stand today and where we are likely to go next.

Put simply, the setup is hardly bullish for the S&P 500 Index as we progress through the final quarter of 2016.

First, the corporate earnings situation remains deeply challenged. The earnings outlook is critically important to the stock market, for it is the “E” in the all-important “P/E ratio.” Thus, if the “E” is shrinking, the stocks that investors own become increasingly more expensive even if the price is grinding nowhere. And such has been the case over the past two years since corporate earnings peaked in 2014 Q3, which is not coincidentally at the start of this sideways grinding period.

Indeed, while corporate earnings are expected to deteriorate even further for Q3 on an annual basis once the final numbers from the quarterly earnings season have been tallied, they are expected to gradually improve in the coming quarters thanks in large part to the gaping profit holes caused by the massive drop in oil prices back in 2014 and 2015 begin to roll off. But with stocks trading at historically high valuations at present, even an unlikely robust corporate earnings recovery will do little in bringing current valuations down from nosebleed levels.

Also, the technical outlook for the S&P 500 Index is looking increasingly like a market that is breaking down. At the moment, the S&P 500 is continuing to hold support at its previous all-time highs of 2134.72, but it has been increasingly testing this support level over the past month as well as the level below it at 2116.48 on the S&P 500 Index.

Given such a soft breakout induced almost purely by the post ‘Brexit’ euphoria in early July (huh? Sounds like something only liquidity-spraying central bankers could cook up), the fact that stocks are already repeatedly testing these previous resistance, now support levels is a bad sign for the ability of stocks to continue holding their ground.

Focusing in on the red box in the chart above, we see that a number of key technical readings are presenting a market that is increasingly wearing down. The S&P 500 Index has been steadily setting a sequence of lower highs since mid-August. And on Thursday, it managed to touch a lower low on an intraday basis for the first time since early September.

Over this same time period, the relative strength of the S&P 500 Index has been on the wane. Over the past month plus since early September, relative strength also switched over from consistently bullish readings steadily over 50 to bearish readings below 50.

Adding to the concern is the fact that momentum has been on a steady ski slope downward from strongly positive readings on the MACD in the immediate aftermath of ‘Brexit’ in early July to consistently in negative territory over the past month.

At the same time, money flow has been consistently fading from strongly positive readings in late July to marginally negative and trending lower today.

Time For A Detoxifying Cleanse

So the market appears to be heading toward a correction. But the first point to mention is the following. Just because it looks like the S&P 500 Index is headed toward correcting does not mean that it actually will. A characteristic that has repeatedly defined the post crisis U.S. stock market is that just as it looks like the bottom is about to go out from under the S&P 500, it somehow manages to find its footing time and time again to rally its way back higher.

As a result, we should not be surprised if we suddenly see the stock market regain its vigor once again and push its way back to the upside. After all, U.S. stocks had many of the makings of a market that was ready to fall into correction in August and September, yet here we are today still grinding along.

But suppose we do fall into cleansing period sometime over the next few weeks. What, if anything, should investors do about it? What magnitude of a correction should we expect? And how long is it likely to last before we see some relief?

In order to answer this question, it is worthwhile to reflect back on the stock market dating back over the past decade, nearly all of which includes the financial crisis period and its aftermath. In each of the past nine years, through both good years and bad, we have seen at least one correction of -5% or more take place during the period from August to December with the magnitude of the average correction coming in at around -10% excluding the fall of 2008.

Thus, a correction in the -5% to -12% range should not be ruled out in the next few weeks. It should be noted that at present, the S&P 500 Index is currently -2.5% below its recent highs, so today’s market would already have at least some of any potential near-term correction already baked in.

What is the most likely correction magnitude in the short term? Something in the -6% to -7% range overall should be considered likely. For a correction of this magnitude would bring the S&P 500 Index back to both its 200-day and 400-day moving averages, which is likely to provide support on any initial corrective move lower. Moreover, a correction in the range of -7% has historically been the pain threshold at which the U.S. Federal Reserve typically begins to relent with soothing words about backing off on any monetary tightening in the near term.

And given that the Fed has conditioned the markets to think that it will be raising interest rates in December, it is already armed and ready with the policy concession of backing off on this rate hike to get the U.S. stock market back into good cheer again.

And if such a correction were to unfold, exactly how long should we expect it to last? August to December corrections in recent history have tended to be sharper and shorter. And given that we are already late in the year in mid-October, it is likely that any correction that were to unfold over the next few weeks would likely be swift, which could end up being unsettling to investors, many of which may already be braced for the “big one” where the stock market finally falls and does not come back.

But for as prone as the market is to corrections during this time of year, so too is it inclined toward bouncing strongly following these sharp corrections. For example, the average rebound following these corrections over the past decade has been +12.6%. And the sharper the market corrects, the more meaningful the subsequent bounce higher. This even includes the period in 2008, as stocks rallied by +27% from mid-November through early January following the dramatic declines that came before in October and early November.

Seek To Benefit From Any Purifying Stock Market Experience

Thus, investors may be well served to actively seek to capitalize on any short-term correction in stocks in the coming weeks. If the correction is shallow – say we only see another -2.5% of downside from here in the next few weeks – expect the subsequent bounce to be shallow. And if the correction is more pronounced – suppose the market pulls back by -6% to -7%, or perhaps even -10% or more – expect the subsequent rally to be more profound.

For while the market may have serious challenges going forward from a long-term fundamental perspective, enough liquidity and policy firepower still exist in the system to restore its verve for a respectable bounce in the short term.

Anticipate that any such post correction bounce could last at least through late December and early January. This may be true even if the Fed does end up raising interest rates by 25 basis points in December. But once we begin to move solidly into the New Year, all subsequent bets about market direction are off, particularly if corporate earnings disappoint expectations between now and then, which is very much a possibility. Put more simply, the potential still looms large over the intermediate term to long term for the onset of a new sustained bear market at some point in time going forward.

We’re Issuing a Formal Alert: Something Major is Coming in the Markets

My Comments: I know, I know, I said the worm had turned. Well, maybe not.

Phoenix Capital Research/Sep 29, 2016

Time for a reality check.

The market has had nothing but positives for three months now. BREXIT was contained. The Fed failed to raise rates again. The Bank of Japan and European Central Bank are printing a combined ~$180 billion per month (a record pace) and using it to prop the markets up.

And stocks are DOWN. While the bulls and CNBC shills talk about the markets like they’re in some incredible rally, the fact is that the S&P 500 peaked in mid-August. And if you want to go back further it’s gone absolutely NOWHERE since July 9th.

Seriously, if you cannot manufacture a roaring rally with follow through on the last three months’ worth of news, you’re not going to manufacture one ever.

Indeed, Central Banks have never been more aggressive in their easing.

1. Two of world’s FIVE major Central Banks (ECB and BoJ) are printing $180 billion per month and giving it to the banks.

2. One of the FIVE (the Swiss National Bank) is openly BUYING stocks outright.

3. Another of the FIVE (the Bank of England) just cut rates and announce a new QE program.

4. The last of the FIVE, and the only one that is supposed to be tightening policy (the Fed) hasn’t raised rates in nine months and will not do so until December at the earliest.

And the bulls can’t get it done. So… what do you think is coming next?

Invest or Die

My Comments: This reminds me of an old gag by Jack Benny. Well known for being cheap, he was confronted by someone with a gun who said, “Your money or your life!”. Jack took his time and when pressed for an answer, replied “I’m thinking”.

I’m slowly re-evaluating my focus on not losing money, to a reluctant, let’s have more exposure to equities and bonds. But only for those funds that are not critical to your ability to pay your normal, every day bills. For that money, I have another solution.

By Investing Caffeine on September 24, 2016

Seventy-six million Baby Boomers are earning near 0% (or negative rates) and aren’t getting any younger in the process, which is forcing them and others to decide…invest or die. The risk of outliving your savings is becoming a larger reality these days. Demographics and economics are dictating that our aging population is living longer and earning less due to generationally low interest rates.

Richard Fisher, the former Dallas Federal Reserve president, understands these looming dynamics. Fisher has identified how low-interest rates are increasing investor discontent by pushing consumers to save more in order to meet retirement needs. The unintended consequence from low rates, he said, is “you’re going to have to save a hell of a lot more before you consume.”

Besides saving, the other option investors have is to lower your standard of living. For example, you could continually eat mac & cheese and sleep in a tent – that is indeed one way you could save money. However, your kids and/or desired lifestyle may make this way of life unpalatable for all. Rather, the proper approach to achieving a comfortable standard of living requires you to invest more efficiently and prudently.

What a lot of individuals fail to understand is that accepting too much risk can be just as dangerous as being too conservative, over the long run. Case in point, depositing your savings into a CD at current interest rates (near 0%) is the equivalent of burning your cash, as any income produced is overwhelmed by the deleterious effects of inflation. It would take more than a lifetime of CD interest income to equal equity returns earned over the last seven years. Since early 2009, stocks have more than tripled in value.

Given the prevailing economic and demographic trends, investors are slowly realizing the attractive income-producing nature of stocks relative to bonds. It has been a rare occurrence, but stocks, as measured by the S&P 500, continue to yield more than 10-Year Treasury Notes (2.0% vs. 1.6%, respectively). The picture for bonds looks even worse in many international markets, where $13 trillion in bonds are yielding negative interest rates. Unlike bonds, which generally pay fixed coupon payments for years at a time, stocks overall have historically increased their dividend payouts by approximately 6% annually.

With a scarcity of attractive investment alternatives available, investors will eventually be forced to adopt higher levels of equity risk, like it or not. However, this dynamic has yet to happen. Currently, actions are speaking louder than words; risk aversion reigns supreme with Americans tucking over $8 trillion dollars under their mattress, in the form of savings accounts, earning next to nothing and jeopardizing retirements.

Even if you fall into the camp that believes rates are artificially low by central bank printing presses, that doesn’t mean every company is recklessly leveraging their balance sheets up to the hilt. Many companies are still scared silly from the financial crisis and conservatively managing every penny of expense, like a stingy retiree living on a fixed income. Thanks to this reluctance to spend and hire aggressively, profit margins are at/near record highs. This financial stewardship has freed up corporations’ ability to pay higher dividends and implement discretionary stock buybacks as means to return capital to shareholders.

With the dovish Fed judiciously raising interest rates – only one rate hike of 0.25% over a decade (2006 – 2016) – there are no signs this ultra-low interest rate environment is going to turn aggressively higher anytime soon. Until economic growth, inflation, and interest rates return with a vengeance, and the persistent investor risk aversion abates, it behooves all the cash hoarders to….invest or die!

Here’s how bruised bears should approach this resilient stock market

bear-market-bearMy Comments: I’m facing increased criticism for preaching woe and gloom. In spite of a 24 month rain dance to herald the start of a storm, the sky is still clear, if a little overcast. Maybe it is different this time.

That being said, it’s time to stop with the woe and gloom and focus instead on steps to take advantage of the situation. As a friend pointed out yesterday, this stuff cycles and, yes, there will come a bad downturn, and you will be declared right. Meantime, you miss out on all the good stuff and end up stiffing your clients.

So… how do we set ourselves up to be successful? Here’s a start.

by Anora Mahmudova | Published: Sept 27, 2016

It is perfectly fine to be pessimistic about future stock market returns, as long as you’re prepared to think outside the box when it comes to seeking out safe investments, analysts said.

There is no shortage of scary charts and lousy fundamentals that point to equities being risky. But they rarely, if ever, can be used to pinpoint a market top. Indeed, bold bearish calls continue to get rebuffed in this long-running bull market.

Recall that in early January, RBS analysts made their highly publicized call to “sell everything except high quality bonds”.

Barely a month later, when the S&P 500 SPX, +0.64%  dropped to multiyear lows to mark a third correction in less than two years, it seemed the call would be vindicated. But after nine months, it is apparent that heeding it would have been costly as markets soon rebounded and then rallied to records.

Valuations are above historical averages and earnings growth has deteriorated over the past two years—all suggesting that, in the long term, returns are going to be low.

Wouter Sturkenboom, senior investment strategist at Russell Investments, said the current environment has been among the most trying he can recall for market bears.

“Normally, if you feel bearish about the stock market you would be looking for safe bets but right now, all the traditional safe bets are no longer safe,” Sturkenboom said, in an interview.

Even bonds, which tend to rally when things get gloomy, aren’t a reliable wager.

“Bonds are overvalued, which makes exposure to duration risky if inflation rises even by a bit,” he said.

Duration is a measure of the sensitivity of a bond’s price to a change in interest rates. Bonds with higher duration carry more risk.

The first step investors should take now is to accept that future returns will be low, said Michael Batnick, director of research at Ritholtz Wealth Management.

“Stocks are expensive on every metric you take and that means that future returns will be lower. Investors should simply accept it and act accordingly, which means saving more,” he said in an interview..

“The idea you can take lower returns and turn them to get higher returns by timing is ruinous for average investors. It doesn’t work for the vast majority of investors. Even if you knew with precision how much earnings will be next year, you won’t know what multiple millions of investors are going to pay,” he said.

While pessimism about returns is pervasive, there are still ways to invest and build wealth.

Both Batnick and Sturkenboom advocate adding assets with lower valuations while trimming exposure to expensive U.S. large-cap equities.

“For investors looking for safety bets, they should think outside of the box. Safety now comes in cheap valuations and there are several assets that could fit the bill out there,” Sturkenboom said.

Among assets that Sturkenboom prefers are Spanish and German real-estate investment trusts, gold ETFs, Treasury inflation-protected securities, or TIPS, and cash.

While cash gives investors the option to swoop in and sweep up bargains when the market tanks, it requires patience as big drawdowns are rare events, Sturkenboom said.

“Cash is good if you are tracking markets and can deploy it quickly. The past three years have been disappointing for those who held cash and were unable to buy at corrections, because they were very short-lived,” he said.

“But in the current environment it is still worth it to keep cash for the eventual 30%-40% drawdown, the likelihood of which is pretty high over the next three years,” he said.

Batnick is a fan of rules-based planning: “You have to have a plan and stick to it. Allocate to markets that are cheap on relative and absolute terms, but don’t try to wing it,” he said.

“Building wealth through investing in the stock market requires a lot of pain. There will be big drawdowns. But more money has been lost by trying to avoid drawdowns than by staying invested,” Batnick said.

5 Smart 401(k) Moves to Make Now

financial freedomMy Comments: You say you don’t have a 401(k)? Maybe you have a 403(b), or an IRA with exposure to the market. If you are in or close to retirement and your investment portfolio goes to hell, you simply don’t have enough time to hope it recovers and gets back on track. Be defensive for a while and sleep better at night.

by Carolyn Bigda | September 26, 2016

Storm clouds are forming, so take your nest egg off autopilot and steer to clearer skies.

Blissfully, making your 401(k) grow hasn’t been that hard in recent years. Since March 2009, the S&P 500 index of U.S. stocks has more than tripled in value. And thanks to the Pension Protection Act—now celebrating its 10th anniversary—many workers are automatically enrolled in 401(k)s. “Inertia has led to some pretty powerful results,” says Katie Taylor, director of thought leadership at Fidelity.

But inertia works only as long as the winds are blowing in the right direction. Today there are signs that momentum could be shifting. U.S. equities, for one, are as frothy now as they were leading up to the 2007–09 bear market and the Great Depression in 1929. The S&P 500 trades at a price/earnings ratio of 27.3 based on 10 years of averaged profits, a 63% premium to historical averages.

Meanwhile, corporate profits have been declining for five consecutive quarters, the worst such streak since the financial panic. And worried fund managers have amassed large piles of cash, according to a recent Bank of America Merrill Lynch survey.

None of this means your 401(k) needs a major overhaul. This is, after all, your long-term portfolio, meant to endure choppy air from time to time. But a few tweaks now can help ensure that inertia doesn’t work against you—and that you’re still on track no matter what happens in the market.

Get over your fear of bonds

If you haven’t rebalanced your 401(k) in a while, it probably looks different from what you remember. Without rebalancing, a moderate 60% U.S. stock/40% U.S. bond portfolio at the end of the last recession is now closer to an aggressive 80% equities/20% bond mix, according to Morningstar.

The rule of thumb: If your weightings are off-kilter by five percentage points or more from your desired mix, it’s time to take action.

Some investors, though, may be wary of rebalancing into bonds now, notes Maria Bruno, a senior investment analyst in Vanguard’s investment strategy group. That’s in part because fixed-income prices fall when interest rates rise, and the Federal Reserve could lift rates before the year is out.

But “rebalancing helps protect you from short-term volatility,” Bruno notes. Even if fixed-income prices fall, bonds can still serve as a cushion. The worst calendar-year loss for intermediate-term government bonds was 5.1%, in 1994. By contrast, the worst loss for blue-chip U.S. stocks was 43.3%, in 1931.

You can further reduce risk by choosing bond funds with an average “duration” of about five years or less, which are less sensitive to interest-rate moves, says Peter Mallouk, president of Creative Planning in Leawood, Kans. (A duration of five implies that if rates rise one percentage point, the fund could lose 5% in value.) You can look up this figure for your plan’s fixed-income offerings at If your 401(k) doesn’t offer a good low-duration option, go with a core fund such as Dodge & Cox Income DODIX 0% , with a duration of just four years, in your IRA. The fund, which has beaten more than 80% of its peers over the past five, 10, and 15 years, is in our MONEY 50 recommended list.